A Tribute to the Thoughts of Another and his Friend"Everyone knows where we have been. Let's see where we are going!" -Another

Monday, December 6, 2010

Brodsky on Gold

“…the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”- Ben Bernanke, November 21, 2002

“Zimbabwe fell into a trap of a relentless casino economy. In that context, central banking had to become more of a national survival art and much less a doctrine of pushing and advancing dogmatic economic theories.”- Gideon Gono, Head of Zimbabwe Central bank, 2008

“Issue after issue of currency came; but no relief resulted save a momentary stimulus, which aggravated the disease. The most ingenious evasions of natural laws in finance which the most subtle theorists could contrive were tried – all in vain.”- Andrew Dickson White, writing in 1896 about the destruction of the French assignats of 1796.

“What is needed is credit. The credit that I propose to establish will be different in its nature from the kinds of credit now in general use.”- John Law, Comptroller General of France, 1720

I read the following piece on Barry Ritholtz' Big Picture blog yesterday. It was a talk given by Paul Brodsky at an investment conference in New York on October 25, 2010. Other speakers at the conference were David Rosenberg, John Mauldin and Barry Ritholtz.

Paul Brodsky is the CEO of QB Asset Management. I emailed with him today, and yes, he is familiar with FOFOA. The quotes above were sent out by Paul on the day of the last Fed meeting. I came across them on a post while Googling to find his email address. I thought they made a nice intro and were timely given the Ben Bernank's most recent public appearance.

Frame 1: Thank you, David (Abramson). I’m honored and delighted to be here.

I’m going to take what many in this room may see as a radical point of view — that our almost 40 year-old global monetary system has already been irreparably harmed, and that it’s well on its way to being replaced.

For those that saw Barry Ritholtz this morning, I assure you I’m not just back from Roswell searching for UFOs. I don’t think the world will end after the current monetary system does. We won’t wake up one morning to find our property has been taken away, at least not in nominal terms. But I do think there will be a major transfer of wealth – manifest through unimaginable inflation — and that investors that begin to view asset values in real, inflation-adjusted terms today will benefit at the great expense of those that don’t.

My argument is grounded in history and macroeconomic fundamentals that my partner Lee Quaintance and I find very compelling. For the record, prior to opening a macro fund we spent twenty-odd years apiece as bond traders, running government and credit trading desks for one of the world’s largest banks and on the buy-side running fixed income investment funds. We went off the ranch only when we began to follow the money, or to be more precise, when we began to define and count it.

Frame 2: This graph shows how the US economy levered itself through what we term “unreserved credit”. The green line is the growth in M3 and the blue line is output growth. As you know M3 was the only monetary aggregate that included overnight repurchase agreements Wall Street banks use to finance their balance sheets. We can see that from ‘94 through March 2006, (when the Fed stopped reporting it), M3 grew almost 12% annually.

The point here is that Wall Street consistently tapped into an ever-increasing supply of overnight credit and then helped distribute term-funded debt throughout the system. From this systemic debt mismatch the entire global economy ultimately became dependent on the US Fed.

At first this term credit flowed broadly into financial asset markets. When equity markets blew up in 2000, it flowed into housing. When that credit finally blew in 2007 there was nowhere for it to go except back to the Fed. This is what we’re seeing today.

So while it may seem that great wealth was created from ’94 to 2006, we would argue the majority of it was not wealth at all. It wasn’t capital either. It wasn’t even money in the real sense. Ultimately it was overnight, unreserved credit.

Frame 3: Let’s take a look at how far over our skis we currently are. The top row in this table shows the US Monetary Base, which is basically all outstanding currency and electronic bank reserves held at the Fed. We can see it almost doubled from ’94 to 2006 and then it really took off in the last few years from Quantitative Easing. Yet despite this enormous growth in base money, there still isn’t nearly enough money in the system to repay our debts.

You can see total Treasury obligations in the second row. The Fed would have to manufacture about 7 times more dollars than exist today for the Treasury to be able to meet its obligations. That’s an obvious problem both fundamentally and for the global perception of dollar hegemony, which of course we see playing out today in FX markets.

The seventy trillion dollar figure in the fourth row is an estimate of total dollar-denominated claims. This includes Treasury debt and unfunded federal obligations, as well as mortgage, auto, consumer, corporate, state and municipal debt. Think about this: 70 trillion in dollar denominated claims on top of 2 trillion in currency and bank reserves with which to repay it! The US economy is levered roughly 35 to 1 today.

Certainly the gap doesn’t need to close completely – there will likely always be credit balances larger than the base money stock. But given the sheer size and maturity of the US economy, it seems obvious this gap is biased to widen.

Frame 4: We’ve found that in the current environment it’s best to ignore what policy makers say — or even what they may intend to do — and better to rely on logic and history.

There are only two ways economies can de-lever. Either the value of credit can deflate naturally, or the stock of base money can be expanded to an amount that would let debtors meet their obligations. Pick your poison. Credit deflation implies shrinking output and rising bankruptcies, unemployment, and maybe even social unrest. Monetary inflation, on the other hand, implies a general cheapening of the currency’s relative purchasing power.

In the end we think there’s only one outcome. Monetary inflation is the only politically practical answer because most voters are debtors, and most debtors would greatly benefit from having the burden of repaying their debts inflated away.

We expect politicians to be politicians and policymakers to execute policy. We don’t expect familiar post-War monetary policies, or true austerity measures, or a strategy of waiting over time for everyone to accept their fate.

Frame 5: The facts are that Western economies are now too big in nominal terms to sustain real production value. As a result, our public markets are financing very few capital-producing enterprises. More than ever we are funding speculation rather than production.

In a fiat system there is no formal capacity constraint on money creation, and so in Western economies, where policy is dominated by Keynesian political economists mandated to actively solve economic problems, there is literally no mechanism to limit money creation.

In such policy-centric economies we can have debt deflation and monetary base inflation at the same time. This odd combination challenges modern economic orthodoxy at its core, yet it describes precisely the current economic environment. Most contemporary economists and investors see “disequilibrium” today because their models have broken down. We think in reality they are mis-diagnosing inflation’s pathology.

For example, they call price increases “inflation”, which of course is wrong. Money growth itself is inflation, as Von Mises, Hayek and Friedman showed. Most Western economists also model increasing demand versus supply as necessarily inflationary, which is wrong too. In a fiat system the supply of goods and services may overwhelm the demand for them, however price levels may be kept constant or even rise as demand falls — simply because central banks can decide to digitize more money.

The point here is that money growth ultimately leads to price increases that may then show up in price baskets. Want proof? Most everyone didn’t see the runaway inflation of the seventies until it was too late. The CPI, interest rates and capacity utilization were falling in 1972, much as they are today. But just two years later US CPI had risen from about 3% to 12%.

Why did prices suddenly jump? Not because there were bad guys in the Middle East hiking oil prices or because there was bad weather in the US Midwest. Prices rose in the seventies because Washington started printing money in the sixties. This drove down confidence in the Dollar.

Frame 6: Most investors today are not prepared for inflation. The pervasiveness of debt has shortened investment horizons. The almost universal objective is to seek relative-nominal, not absolute-real returns.

Have you asked yourself why interest rates are near historic lows in the face of open-ended Quantitative Easing? Clearly it’s because most bond buyers are generally unconcerned with positive real returns. As a result, today’s low nominal rates are very negative when adjusted for the substantial base money inflation already experienced and the further inflation needed to de-lever the system. As in the seventies, the majority of capital won’t position assets that promise to maintain purchasing power over time.

So yes! We think bonds are in a bubble, but only when we view them in real terms. Even though they may send all money back at par, investors will get back bad money.

Frame 7: Policy makers across economies are now actively targeting lower interest rates so their exports are more attractive. It’s a Whack-A-Mole world. Today’s competitive currency devaluations are tantamount to a high-brow food fight among governments, each having the primary goal of keeping their domestic economies going.

Against this backdrop, Secretary Geithner wants to persuade surplus economies to sacrifice themselves so the US can maintain control over the global system. Clearly, this is a silly and dangerous state of affairs for global investors. Are we supposed to protect our future purchasing power by picking the currency managed by the politicians most willing to disappoint their home constituents?

We don’t think any fiat currency provides safe harbor because all will be inflated. What we’re living through today is a textbook case of rotating debasement occurring just prior to the fall of a global monetary regime. No paper currency has survived in the history of man. They’ve all gone away.

Frame 8: Solving for real returns narrows the list of acceptable investments. We like anything scarce and unlevered and precious metals and scarce consumable resources fit the bill. In periods of high inflation, wealth holders – wherever they are — don’t confuse nominal price for real value. It’s pretty straightforward: the supply of unencumbered necessities drops at low price levels, while the demand for them stays constant or rises. Prices must increase.

Frame 9: We think the greatest upside and least risk is in precious metals, specifically gold. Why? Because gold is a currency, not a capital asset, that does not rely on output growth for appreciation. Its appreciation depends on the dilution of paper money vis-à-vis goods and services with inelastic demand properties.

Gold is not an investment in the normal sense. It is cash in a scarcer currency. It has no more or less intrinsic value than the Dollars, Euros or Loonies in our wallets but it will maintain its relative scarcity to them. So then – the bubble we’re seeing today is not in gold but in paper money, which has grown in the US by 130% in the last two years and is about to double again. Gold’s so called “exchange rate” versus paper money will continually be re-priced higher.

Frame 10: Have you asked yourself how the gold price has climbed for 10 years when consensus has been there’s been no price inflation? We think it’s because confidence in paper currencies has been dropping as their supplies have been increasing. Individual investors, hedge funds and now central banks have begun to dabble. Institutional investors are sure to follow. Goods and service providers and wage earners across the globe will continue to demand increasingly more paper for their goods and services.

Frame 11: So how preposterous is it to expect a new global monetary system backed by inert rocks? Actually, it’s not preposterous at all.

Paul Volcker, as Undersecretary of the Treasury in 1971, was an influential voice when President Nixon broke the dollar/gold exchange standard — an idea that just a couple years before had seemed preposterous itself. Unsurprisingly, prices rose significantly in the following decade, even as output stagnated. Economists hadn’t seen such disequilibrium before and called it “stagflation”.

Ten years later the same Paul Volcker as Fed Chairman had to raise overnight rates to a “preposterous” level at which paper money would again generate positive real returns. Yes, he whipped inflation but what he really did was save the dollar. By raising short rates to 20% he lowered the supply and stopped the ballooning velocity of money.

Can higher interest rates save the day this time? We don’t think so. The difference between 1980 and today is the pervasiveness of debt. Ben Bernanke can’t raise rates even if he and the markets wanted to because it would trigger wide spread systemic defaults. We would have a substantial contraction in US economic output that wouldn’t be shared by surplus economies (not to mention Western banks would be annihilated in the process).

In practical terms, we can’t lower rates below zero and we can’t raise them. What about debt-focused quantitative easing? That won’t work either. An economy can’t be de-levered by issuing new debt or by transferring existing debt to government balance sheets.

And consider this: in the last two years the US monetary base grew over 130% and yet output grew a total of only 7.5%. This compares to 88% growth in overall output over the previous twelve years on a 95% growth rate in base money. The point here is that the efficacy of monetary inflation on output growth has diminished substantially.

So we think there has to be an unconventional way for policy makers to press the economic reset button — something as “preposterous” as breaking the gold exchange standard in 1971.

Frame 12: We think we know what to expect: ultimately the Fed will formally devalue the dollar to gold and then it will conduct monetary policy on the much higher dollar/gold exchange rate, just as it has conducted credit policy with interest rates over the last generation.

A few years ago, Lee and I modeled gold using the old Bretton Woods formula and we came up with a “Shadow Gold Price”. When we divide today’s US Monetary Base by official US gold holdings we arrive at a dollar value of about $8,000 an ounce. A big number to be sure, but math is math. An $8,000 gold price would represent the magnitude of dollar devaluation necessary to reconcile all past monetary base inflation. It is a price based on fundamentals, modeled using post-War experience.

Is $8,000 a realistic target for gold? Why not? In fact we could see it rising even higher given the ongoing political imperative for monetary inflation.

We shouldn’t be price anchored. At its speculative peak in 1980, spot gold traded at a premium to the Shadow Gold Price. Today, it trades at an 80% discount. When gold was trading at $50 back in the seventies, who thought it would peak at $850, or who thought the NASDAQ would peak at 5000, or, for that matter, that 2-year Treasury notes would trade at 35 basis points today? As with all other multi-year bull markets, we think gold will go parabolic at some point before its bull run is over. Maybe it’ll look like this blue line?

Frame 13: And finally, despite all the chatter the data show that financial asset investors simply don’t own gold yet. Gold ETFs total about 67 million ounces, which is only about $90 billion. The aggregate market cap of gold and silver miners is less than Google’s. Only $2.6 billion flowed into all resource mutual funds in the third quarter.

These small figures compare to about $26 trillion in pension money alone – a sector that has dedicated only about 56 basis points to precious metals. If we include all investment portfolios, we get a gold commitment of just 15 basis points. If you want to round that it would be 0%!

Physical bullion is held in strong hands. Financial asset investors holding derivatives like Comex futures won’t be able to take gold’s price down for any length of time because fundamentals are not on their side and because they have no staying power in their positions. Besides, we know several central banks holding billions and trillions in paper dollar reserves that would have a bid for all they own – and more.

Frame 14: So it is with great humility and rationality that I admit to you today: my name is Paul Brodsky and I am a gold bug…at least until the ratio of debt to base money contracts to the point where we can get positive real returns in financial assets again.

Someone should be able to state the 55K potential of gold in a single paragraph or perhaps two that stand on their own without reference to the failure of paper. If the statement has inherent truth that is all it will take and it will shine out from so few words.

"Gold is the only money the world has ever known. Sounds like a simple thought but it isn't." - ANOTHER

Prior to finding FOFOA's blog I have read much of Fekete's work and it opened a lot of doors to deeper understanding of monetary history and it's characteristics. The thing that was most interesting to me was his step by step dissection of mechanism behind interest rates, discount rate, RBD,... The more I read the more things were falling in place.

I still frequently visit his site re-reading old posts and checking for new ones.

One of the big problems I had with his writing was/is his claim that every bill matures into gold coin. It assumes that every product that has been produced is also consumed which we can all agree is not the case in real life.

What happens to value of that bill if there is no gold coin at the end? MF - Before you get cut off (I also wonder how come you won't have internet access?) maybe you can explain that?

I don't think that any long standing participant at this blog is advocating censorship of thoughts, I'm sure FOFOA would walk him/her out of the door.

Nevertheless you can't come to someone's house and start criticism of his carpet and pressuring him to change it and to listen to your expert advise and at the same time admiting you don't actually own any. That is what you were saying when stating you haven't read much of FOFOA's blog and the following comments. You just don't do that on your first visit.

Costata has been a valuable source of info and insight to this blog. I am sure he wouldn't react in such a manor if you showed some respect first.

Hope you can shed some light on that question a stated and I urge you to return after the blackout. There is no censorship here only free market of thoughts that are weighed upon their's utility.

Consumption in this case means the product is bought by the end user. If there is no gold to pay then the person who drew the bill loses credibility and will no longer be able to draw bills on his goods ( this is what happened historically).

My own try at a explanation for why gold is absolutely needed is here :

I agree with you regarding the loss of credibility for the producer that draws bills for product that are low in demand.

You then understand that peoples perception change frequently and the product that is produced goes out of fashion sooner then in 3 months (season) there are also other possible/quite normal reasons why the consumer won't buy as much as it's produced. In this case some/part of the bills are frequently rendered worthless (not worth less!).

In time I guess the discount rate for that producer goes up. But in the end we still end up with a supply of RB's. There is a loss of capital no matter how you twist it.

Do you think this can be achieved with bank bills also (FRN's, euro bills,...) with a steady increase of their supply?

I think FOFOA advocates for gold as settlement in international trade not within country's borders. That may help you with your question regarding medium of exchange part.

I'm hesitant to reply, I don't like being accused of monopolizing anothers' blog ( because due to the volume of my comments on the previous post it has the ring of truth).

Historically 91 days Works, even if it matures sooner. This was for ease of comparison between different bills.

If the consumer doesn't consume as much as as produced then that supply is not used and the producers bills are not realized in gold, meaning a loss of credibility for him. ( hope that makes sense in terms of implication)

Make no mistake, the debt is not written off, but the realization of untimely payment ( being late) affects the producer credibility.

"Do you think this can be achieved with bank bills also (FRN's, euro bills,...) with a steady increase of their supply?"

It is very very very important to understand that this does not apply to anything else. Those are not liquid earning assets and must not be kept on books as that, to do so is fraud.

"I think FOFOA advocates for gold as settlement in international trade not within country's borders. "

Yes, my question was why. What is the problem he sees?

You must understand that my subsequent postings were all related to this first question.

The second I posed is related implicitly. As long as it is not made unlawful to pay in physical gold, then things will work out. I tried to establish legality in the second question.

Thereafter I tried, for the most part, posting my arguments as to why gold is fine as both medium of exchange and store of value, looking for intelligent criticism. Being called "shit for brains" doesn't qualify as valid criticism in my book. lmao.

"To not get misunderstood. The gold settlement on international stage only comes into play if there are no other products that can be used to settle the account."

Sure. This is how it worked historically, if you have read economic history as explained by Fekete ( whom I agree with).

Thank you for your explanation and time invested (I know you're running out on it) :-)

After reading your answer I think I can explain what the "problem" is. You see we have been reading/visiting this blog for quite a while now and have basically understood that we do not seek to explain the world as it should be but as it is going to be (at least we think so). As FOFOA put it as an "observer" not as an "activist".

You surely remember the example from Fekete's writing of a fair where people with products/goods enter the fair and leave with other/same product/goods or gold. They exchange goods/product with the help of scrip (as a medium of exchange) and get gold only if they have exchanged everything and are left with scrip.

As you can see people attending this fairs were on the same scrip/currency during the fair and went home with goods and gold (if they sold more goods than they bought). There is no reason for them to hold other people's currency (medium of exchange)as part of their savings. This can explain why there is no need for other international reserves beside gold.

That leaves a country with only gold and their local currency as reserves. In this case there is Gresham law that you must have heard of and state that good money will be hoarded and bad will be spend.

My frustration with MF stems in part from his lack of insight into Fekete's teachings. If you profess to be a student it behoves you to study and think deeply about your teacher's teachings.

In discussing the RBD, Fekete writes of a time when gold was the penultimate money. He describes a relationship between three main actors. Emitter of real bill, acceptor of real bill and clearing house. He states that (ultimate?) settlement was in gold. Please consider this: How many times was a real bill traded (via a clearing house) between emission and settlement? For the monetary historians: What was the 'velocity' of a real bill?

(Again for the monetary historians, consider this, did real bills and gold have the same velocity?)

IMVHO the single most important word Fekete uses in his explanation of the role of gold in this real bill system is (please forgive the 'shout') DISCOUNT.

Gold cannot pay interest. In order for a return to be paid in gold the 'counter-party' must agree to a reduction in their entitlement to the price of the collateral pledged in debt or from the goods offered in trade. Hence the use of the word discount as opposed to interest rate in Fekete's explanation of the system.

It's part of my foolish nature that I think in concepts not words. Words are just used to describe concepts from my view.

What is interest? Isn't it getting back the same thing you gave plus more of it. Is discount a better word for it? sure ok. but in my mind it's just a point of view.

Thanks for your civil explanation this time.

My issue with what you have said is simple.

"to a reduction in their entitlement"

Another point Fekete makes is that they are not entitled to the full face value of the bill. It would help if you try to understand why. When you do, some of the other things he says may appear in a different light. Such as the power of a gold coin in the hand of a consumer.

"Gold cannot pay interest. In order for a return to be paid in gold the 'counter-party' must agree to a reduction in their entitlement to the price of the collateral pledged in debt or from the goods offered in trade. Hence the use of the word discount as opposed to interest rate in Fekete's explanation of the system."

Is it fair to say then that both interest and discount are, in this context, in effect, rent, or perhaps they could be understood as some sort of "risk premium" though clearly the two are arrived by different means.

The way I see it we must learn from history so as not to make the same mistakes yes?

I agree gold will be used in future. But if we are not very careful in learning from the past we will make the same mistakes and it will fail again.

In my opinion government controlled paper money was part of the problem, whilst privately controlled paper money was not.

The difference between those two entities controlling paper supply is monumental.

As far as I can ascertain, in simple terms, government paper kills gold while private paper makes it free.

@Edwardo

risk.. hum, ho. there is not really much risk involved in real bills, this effect is negligible. One must search deeper for the reason. I understand you are trying to describe it in different words, but I always feel it important to be careful of bad concepts creeping in that way.

@costata

Oh and are you ever gonna stop with the subtle insults or am I just going to have to get used to that? lol

MF - Since you admit that you do not fully understand the Freegold concept that FOFOA spends COUNTLESS hours laying out before us I ask that you please take some(of your own) time and read the archives of ANOTHER and FOA and the read all of FOFOA's posts TWICE before you continue to clutter up the comment section.

I and I'm sure many others do appreciate a different view on the subject but as you said you read this blog from a 3rd world country..well I do too. Please save their writings and read it at your leisure because I and I'm sure many others do not have a solid(or fast) connection to the internet. You are wasting valuable time of thousands of people..ATTEMPT to understand where FOFOA draws his thoughts from and then debate. Thank you

I appreciate the sincerity and conviction of your points regarding real bills.

Your view seems to be that you would broadly agree with the bulk of the concept of Freegold as expressed by our Friends, but that physical gold as a floating store of value should be joined in this role by a temporary form of physical gold backed credit?

You admit that not all bills will be repaid, and yet they should circulate at par with physical gold?

The issuing of gold-backed credit (real bills) is artificial inflation of the store of value, is it not? Diluting the value stored by holders of physical? Sure, the bills are limited to 91 days, but they are continually issued.

It seems to me that the real bills of which you speak are expected to supply at least part of the productive capital required to produce goods. Thus the producer is using real bills (credit) to combat insolvency. Why should this extension of credit be necessary to a sound, well capitalized business?

In a Freegold paradigm, there will be no shortage of capital available to viable and necessary enterprises, especially as demand for much non-necessary production will diminish.

You say: ”Leaving paper creation in the hands of government is folly.” But with Freegold the govt's incentive not to go crazy printing will be to keep people from cashing out, so I don’t see a problem. If the people have a stable and trustworthy store of value available to them, the shape, form and role of government will be radically different than now, as will banking and “financial services”, along with the behaviour and motivations of individuals, and indeed most other aspects of human society which we currently take for granted and presume to be "the way things are".

In short, everything will be different, so extrapolating the structures, behaviours and motivations of today into a completely different paradigm is short-sighted, as is engaging in debate about said extrapolations.

At the end of the day, it appears to me that Freegold can operate quite successfully without the complicating addition of credit via real bills, so the onus falls upon you to demonstrate why this credit is necessary.Has it occurred to you that the Freegold system may not require real bills?

The archives of both Another and FOA are linked at the top right of this page. They are required reading.

1. Broadsky believes a future gold price of $8,000 based on the current two trillion (1.972T) USD monetary base. Brodsky stated “So then – the bubble we’re seeing today is not in gold but in paper money, which has grown in the US by 130% in the last two years and is about to double again….”, Therefore IMO, he actually believes a revaluation to $16,000 based on the monetary base doubling again shortly. I think he didn’t highlight this doubling because he already believes people will think he just escaped from Roswell with the $8,000 gold price projection.

Now we have a $16,000 gold price based solely on current and near future monetary base increase. Add to that base another 70-112 trillion in USD based unfunded liabilities, plus derivatives, melt-down of paper gold markets, etc. See no problem with a $55,000 gold price or 1 oz. per BMW.

2. Broadsky also stated “You can see total Treasury obligations in the second row. The Fed would have to manufacture about 7 times more dollars than exist today for the Treasury to be able to meet its obligations…” Now we will project this math forward, 7 X $8,000 = $56,000 dollar gold price needed for the Treasury to meet it’s 13.562T obligations.

Damn, looks like FOFOA is wrong about his $55,000 gold price projection. Missed it by a mile or 1K. Guess he needs to work at McDonalds for a while or even better we might incite Shelby to exit his bunker in the Philippines and start posting again on this blog.

A good 'ole' currency crisis with a total loss of confidence in the USD could easily value gold higher than $55,000 oz. Guess I will be buying my BMW with a fractional gold coin.

Historically when the SHTF in Germany, Armenia, S. Viet Nam or ‘you name it country’, refugees did not stick a BMW in their pocket to enable them to start a new life in a different country.BMW’s will not be a store of value in a enduring crisis, however gold always has and will continue to be the ultimate value storage.

My only question to FOFOA, will that fractional coin be a 1/10 oz or will it cost me an outrageous price of ¼ oz for my BMW.

If any inquiring minds might accidentally stumble across it from a new pathway, for example I have just gone there and Readcasted it to my Scribd and Facebook communities in the hope that at least one person might take a quick look, they might make it far enough in to at least spot the early exerpt I have pasted below, which I think ought to be an interesting tidbit to anyone that is paying attention... especially Dollarholders, but really almost anyone.

FOA: Modern digital currencies are today defended in the open market with Currency Exchange Reserves, not Gold. Most countries call their gold reserves. But, no country today classifies it's Gold as Usable Exchange Reserves . The Euro will! Of the 40 to 50 Billion in reserves that the ECB will hold to defend the Euro, some 15% will beGold Bullion. Unlike currency reserves that will be sold to purchase Euros as defense, goldreserves will be added by selling Euros to buy gold from the EMCBs. At present, the dollar hasonly one competitor for reserve currency status on the world stage, gold.

The dollar has been made strong in a low gold price. To compete with the dollar for world reserve recognition, the ECB will add Euros to the EMCB(European Member Central Banks) to replace their gold. The EMCB will then be free topurchase gold on the open market, using no longer needed US dollar reserves. Remember, theEuro will be the main currency reserve of Europe. The ECB will not have to sell it's currencydollar reserves as they are a small token amount for balance. The roaring price of gold in dollarterms will now make up the lions share of Real Reserves backing the Euro!

I think it will be interesting to see the next quarterly update on the ECB website.

Did anyone find the reserves statement for the Irish CB and/or Treasury, where their gold reserves are recorded? I had a quick look at their sites, but I couldn't spot it on either, unfortunately.

"At the end of the day, it appears to me that Freegold can operate quite successfully without the complicating addition of credit via real bills, so the onus falls upon you to demonstrate why this credit is necessary.Has it occurred to you that the Freegold system may not require real bills?"

There will always be a demand for credit, and therefore credit will always be supplied, if only by loansharks.

Jeff said earlier, "There seems to be a race between US collapse and Europe flying apart. At what point does the stress is Europe get too high, and the Freegold button gets pushed?"

I have wondered this as well. Additionally, after having learned that a very high percentage of Europe's gold resides in the U.S.A., could this have a delaying effect on EMU allowing freegold to happen?

After all, the Europeans know that the U.S. government makes up new rules as it goes along, so I am sure they fear the U.S. commandeering all gold "for the national good."

When a nation faces collapse, a mere issue like stealing other nations' gold is not a big deal--at least not to the powers that control here in the U.S. It is run by criminals.

I do not think FOA or Another contemplated the logistics, and/or assumed international law would be followed.

littlepeople: I have wondered this as well. Additionally, after having learned that a very high percentage of Europe's gold resides in the U.S.A., could this have a delaying effect on EMU allowing freegold to happen?

I think it was you that I recall bringing this idea up recently. I read your Thought again with interest today, and am left with a Thought of my own:

I wonder if anyone here has a link to data on how much is actually kept at the Fed in custody for others?

DP:I read an article somewhere on the net a week or two ago that said Germany has 60% of its gold in the U.S. and another 22% in London, or something very close to that.

Also, on GATA site, I found this:

"The New York Fed added that its vault had contained 226 million ounces of gold in mid-2004, rather than 266 million, as claimed in the earlier version of the brochure.

The vault, opened in 1924, holds nearly a quarter of all the gold belonging to governments and central banks. Other major depositories of official sector gold are at the Bank of England in London and the Bank for International Settlements in Switzerland."

So, if this is accurate, 25% of other governments' gold is in the U.S. A nice stash, to be sure.

The size of the BIS balance sheet is in normal circumstances driven by placements from customers. On 30 September 2010, customer placements (excluding repurchase agreements) amounted to SDR 226.3 billion, compared with SDR 227.8 billion at the previous financial year end in March 2010.

Around 85% of customer placements are denominated in currencies, with the remainder in gold. Currency deposits decreased from SDR 195.8 billion at 31 March 2010 to SDR 192.7 billion at end-September 2010. The share of currency placements denominated in US dollars was 68%, whereas euro-denominated funds accounted for 22%. Gold deposits amounted to SDR 33.5 billion at end-September 2010, an increase of SDR 1.5 billion over the six-month period.

Assets

The assets held by the BIS consist of government and quasi-government securities, reverse repurchase agreements and investments with highly rated commercial banks of international standing. In addition, the Bank owned 119 tonnes of fine gold at 30 September 2010. The Bank manages its credit exposure in a prudent manner, with more than 99% of the Bank's credit exposure rated A- or higher as at 30 September 2010

Franek:Under the paradigm of freegold, gold is separate from the currency. Very few people will own gold, at least initially, so currency prices cannot get too far out of whack, or there will not be enough BMW sales for BMW to stay in business.

The key to freegold is that it alone will become the unparalleled wealth instument. Other items will be bought and sold under the current, or similar fiat currency systems as determined by supply and demand. Our computer systems will allow for that, as will our governments.

Of course, governments will never acknowledge this, or all hell will break loose in a mad rush for gold. No, it will come quickly, when people are unaware. For now, they seek to use paper gold markets to suppress the price, and to make gold ownership look risky. In fact, when the COMEX and other paper longs discover that they will not be getting any real gold, because there isn't any, the longs will sell out everything, and the COMEX gold price will be ZERO.

However, those with the physical are smart enough to know that gold is not of zero value--just the gold "promises" (paper long contracts) will be of zero value.

With as much understanding of Freegold as I can master at this moment, I’m basically trying to position myself for the upcoming events, and thanks to this blog I’ve been buying physical as much as I can.However, I’m still stuck on the subject of shelter.

I’m currently renting and practically out of debt. If Freegold=Hyperinflation, then I have a dilemma…either

1. Keep buying gold, and with an onset of Freegold/Hyperinflation, hope that real estate will deflate against gold, in which case I’ll be able to buy reasonable roof over my head with the gold I buy today, or2. Take mortgage now and with an advantage of low interest rates (keep buying gold in the meantime with what’s left of the mortgage payment), hope that with onset of Hyperinflation (and some gold) I’ll be able to pay it off quickly.

What worries me about scenario #1 is that Hyperinflation will make my rent skyrocket and along with paying for other essentials, will eat up my gold. And, at the same time, I’m not sure if real estate will actually deflate to the level that my limited amount of gold will actually be able to afford me a decent shelter which, in a way, may also deplete my gold either substantially or completely.

Thus, with this said, I’m leaning toward #2, but in light of my very limited understanding of Freegold, I can’t seem to be able to decide, and I feel the time is running out.

I can sense that many of you here on FOFOA’s blog are way past agonizing about such down-to-earth problems, but I would truly appreciate if somebody would level with me here and give some direction.

Franek:You are on the right trail buying physical gold. Keep doing it.

I think U.S. home prices are closer to the bottom, but not there yet. Interest rates have started to rise in spite of Fed attempts to keep them down. As rates rise, RE prices will drop even more.

So, if RE drops more as interest rates rise, and your gold becomes more valuable, it will pre-opt the need for a mortgage at all.

I personally bought 40 acres and built a house on it 11 years ago (before the bubble), and farm/rent the land. I have a mortgage, but my gold would more than pay it off today. But my PMs are rising so fast, I'd rather keep riding that horse.

A lot depends on your finances. If you can easily afford a down payment, and your payments are easily handled, and you'll have enough to buy more gold, then buying now may not be a bad way to go. If it would cause you to penny-pinch, I'd wait.

I recommend you buy as much gold as you can, but keep 6 mos. worth of cash, as during the blackout period (when paper gold promises go to ZERO, and nobody really knows what physical is worth) before freegold fully manifests, you'll need cash to buy food, pay rent or mortgage, etc. You do not want to be forced to sell any gold during this timeframe.

I think you'll be able to exchange some of your gold for a very nice place after freegold.

I truly appreciate that! Thanks to you and other FOFOA bloggers, there seems to be a light at the end of a tunnel. The amount of knowledge, wisdom and hope on this blog is mind boggling. I can only hope to understand it in time to pass it on to many others I know that need it.

@Franek: Personally, I don't expect either rents or RE prices to rocket. As littlepeople said earlier, most people won't have gold so there just isn't going to be a demand-led rise in price for non-essential stuff like that. People are going to be scraping to survive, they're not going to compete for choice property rentals and purchases. They'll move in with family.

Freegold isn't just some happy event where we all get rich and life is back at game on. The deflation will be very real, all around us. It won't be pretty, and you won't be flashing the yellow about town and rolling in a bling new BMW honeytrap with oversize spinners at each corner, parking it outside your new McMansion, your bitches waving to everyone out of the moon roof.

This is just part of the reasoning that a BMW/gold ratio won't look the same as it does today. People will still need wheels, sure, but they'll be looking for the $400 jalopy that still has a couple thousand miles of tread in the tires, like the Joads.

So, no I personally don't think you need to worry over much about missing the RE boat again, is what I'm saying.

DP:"It won't be pretty, and you won't be flashing the yellow about town and rolling in a bling new BMW honeytrap with oversize spinners at each corner, parking it outside your new McMansion, your bitches waving to everyone out of the moon roof."

Hyper-inflation will only reduce the 'cost' of paying down debt if you have a guaranteed source of the currency in ever increasing amounts.

Who benefits from hyper-inflation?

1. Governments with high debt denominated in their own currency because they can issue in ever increasing amounts.

2. Bankers who are the first recipients of currency before it circulates. They can blackmail their creditors into accepting repayment below face value.

3. Stockholders in companies who can withstand inflation but only in nominal terms. Zimbabwe had the best performing stock exchange in the world during the late stages of hyper-inflation.

4. Producers of essential consumer goods eg. food. The farmers may be able to pay off their debts with small amounts of produce.

Everyone else (for example retirees on a fixed income) finds that their cost of living rises to a horrifying level. Conversely their living standards fall dramatically.

As DP observed your location is also important. Hyper-inflation in the USA does not guarantee hyper-inflation everywhere around the world. If you live in a country with a strong currency it could mean that you experience an increase in purchasing power relative to USA citizens provided your CB is able to abandon the US$ for trade.

If you have a debt and gold you may be able to trade the gold for enough currency to pay off that debt. If the debt is secured by a house the local government may be desperate for revenue and trying to stay afloat by increasing property taxes. IMO you have to weigh the risks against the rewards with a local focus.

DP, thanks for your thoughts and the sobering admonition. Like many here (I suppose) I too subscribe to the idea of living within one’s means and realistic expectations, so no problem there.However, trying to read the blog regularly and striving to understand the discussion, I noticed that generally majority of people here tends to subscribe to the hyperinflationary end result…And, when you say “deflation will be very real”… you obviously mean deflation in terms of gold, right?Does this have anything to do with what FOFOA and/or Blondie once alluded to (if I remember and can paraphrase correctly) that deflation and hyperinflation have a lot more in common than many people believe and in essence are very alike, and that in a sense we will experience both at the same time? In other words, inflation in things that we need and deflation in things that we want?Jeez, I feel like a first-grader…

One other strategy that has not been mentioned much about housing debt is that of selling out and radically downsizing so as to get out of debt. In other words, devaluating ahead of time. I know that the real estate market is down now, but if you can sell and get out from under the debt and relocate to a much smaller place that might be a strategy that works for some.

Consider buying a small piece of land and an old used trailer house. After all, what is shelter but simply a place to keep warm and dry and cook your food. If one can do that, be content to live a very austere life style (stay under the radar) and keep accumulating gold on the side, this will probably not be your circumstances forever.

"And, when you say “deflation will be very real”… you obviously mean deflation in terms of gold, right? Does this have anything to do with what FOFOA and/or Blondie once alluded to (if I remember and can paraphrase correctly) that deflation and hyperinflation have a lot more in common than many people believe and in essence are very alike, and that in a sense we will experience both at the same time?"

You see, hyperinflation is exactly like deflation. The only thing hyperinflation has in common with inflation is part of its name. Other than that it looks just like a deflationary depression. In fact, it IS a deflationary depression, with a different numéraire! Just look at Zimbabwe a couple years ago. Other than the fancy wheelbarrows, it looked just like a depression.

Now you might ask, "What's the difference between a deflation denominated in gold versus dollars?" Well, there's a huge difference to both the debtors and the savers. In a dollar deflation the debtors suffocate but in a gold deflation they find a bit of relief from their dollar-denominated debts. And for the savers, the big difference is in the choice of what to save your wealth in. This is what makes the deflationists so dangerous to savers.

The deflationist equation, if properly applied, always leads to the conclusion that the best things to save are cash and Treasuries. And some (not all) deflationists even apply their formula to gold (because they believe it will behave like a commodity) and conclude it must crash to around $200/oz during their deflation. So they warn their readers to stay away from gold.

Can you see how one little flaw in the numéraire can make an analyst very dangerous to your bottom line?

No game changer there. That gold hasn't moved in decades. It's in the same place as when Another started posting. It is simply a fact of the system that a good portion of the world's official gold is held in vaults in New York, London and Switzerland so that it can be exchanged between sovereigns with minimal transportation cost. Short of total war, sovereign gold is not at risk.

@Franek: Apologies for not being more clear. However, yes, you do appear to have understood what I meant. Deflation, particularly in non-essentials, when priced in gold. Wendy has already offered a very good steer to FOFOA's excellent comparison of deflation/inflation/hyperinflation, so I won't attempt to present any more, inferior, clutter of my own! :-)

Franek: So the question is whether to buy or rent in Los Angeles. Is there a third option like somewhere else besides L.A.? Because if L.A. is the only option because of work/family/ect. then I would rent so I could be mobile. The quickening pace of worldwide events tends to lead me to believe that 2011 is going to be a wild ride and the ability to walk away from a property in L.A. might be worth considering.

@ allAnd enough with this BMW issue already!1. You can work your a** off to get it or an oz of gold (moreover in freegold situation). Creating let`s say five times the value added for your company share holders, managers whatever destroying your health in the process.2. You could just buy that damned BMW drive to the nearest gold-bearing river and sift through 20-2000tons of dirt panning for gold to redeem that lost oz and still havin` the wheels. But that may be on the fringes of what is allowed by law and still it is work by the ton.3. You may just say “what the heck” and go “all out” robbing a jewelers shop thus getting an oz or to; or a piece of lead instead, smile.That’s my asymmetric approach anyway. Watch out for any asymmetric game-changing plan form the banksters to “fix” the eCONomic system their way!

While Motley Fool seems to have left us, somewhat hurt, I found his final recommended suggestion for reading to be quite good. It is a 1946 booklet by Hazelit. It maybe well known to many of you but it was new to me. This man be a reflection at my newness to this topic but I found it to be a rewarding read. It defines many of the flaws in economic thinking by simply refuting common fallacies and sophistries. I will reread it and suggest it to others.

In 1999 it took 183 oz. to buy a $55k BMW. Today, to buy a $55k BMW it takes only 40 oz. of gold. Of course, this trend accelerates as the fiat loses its value."

not sure you guys really answered Franek's question. I came to this threat a yr late, ha but I think he has a pt. The problem with your response is the BWM priced at $55k in 99 does not cost $55k now, its probably like $80K. So why is his pt not relevant? If gold goes to $55k then wont all prices adjust accordingly? If all other prices become detached from the price of money then bizarre things would happen. Any wealthy person with a lot of gold could sell all his gold and say buy all the mines of a major commodity producer. Does this make sense? Curious what your thoughts are? Thanks

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